<PAGE>
SEMI-ANNUAL REPORT . JUNE 30, 1998
----------------------------
STRATTON
MUTUAL FUNDS
----------------------------
STABILITY . STRATEGY . SUCCESS
<PAGE>
LOGO
DEAR FELLOW SHAREHOLDER:
At the end of May, the Federal Reserve meetings concluded and the Fed did not
raise rates as they expected the impact of Asia to be felt on the U.S. economy.
The effort to turn Japan around apparently became bogged down in political
wrangling and the Japanese economic and financial scene worsened considerably.
The biggest problem that Japan faces is a crisis in their banking system. This
is very similar to what the United States had with the Savings and Loan
Industry in the late 1980s. Throughout all of Asia there are about $1 trillion
of bad loans that the banking system has on its books that must be written off
against the capital of the banks. During the month of June, there were a large
number of early adverse earnings warnings, many of those taking place in
cyclical stocks. Some of these cited Asian problems and others cited the impact
of the General Motors strike.
Meanwhile, the U.S. economy continues to move along in a positive fashion. Real
GDP growth in the second quarter was around 2.5%, which is down sharply from
the 5.4% of the first quarter. This is influenced by a significant
deterioration in the trade gap as U.S. exports have fallen sharply and imports
of Asian goods into the United States have increased. This should have a
negative effect on real GDP for the future. The pricing power of American
industry is plunging as a result of the Asian recession. It means that many
excess supplies that formerly were consumed in Asia are being shipped into
world markets. American manufacturers have no ability to raise prices and are
fighting very hard to hold pricing at existing levels.
The strong point in the U.S. economy is the American consumer, who has a high
level of personal disposable income and is benefiting from low oil prices and a
very low CPI. In addition, the consumer, especially in the upper brackets, is
positively affected by the wealth created by stock market gains of the last
three years. This has produced significant spending in luxury areas of
services, in housing, and in consumer durables. We see no reason to expect a
change in consumer spending habits based upon current economic trends.
The past six months has emphasized two sectors of the market, stocks with
capitalizations in excess of $20 billion and growth stocks, especially consumer
names. A two tier market now exists. Part of this was the influx of foreign
investment money into the U.S. stock market that was attracted by both
liquidity and identification with the great international names of the U.S.
market. The risk is especially high in the large cap, high price earnings ratio
stocks today. While the companies are very sound and may continue to produce
steady earnings gains, the price of their shares has reached levels that
contain a great deal of market risk. We think the comparison of this market
with the "nifty fifty" of 1972 is very close.
There has been almost a four year period since mid-1994 when growth stocks have
outperformed value stocks. We believe that value will return to lead this
market sometime in the near future. It is always painful to sit through this
process, but now is not the time to be discouraged for those with a value
orientation to their investing style. There is every probability that the
future will be a dramatically different picture than the past six months.
Sincerely yours,
LOGO
/s/ James W. Stratton
James W. Stratton
Chairman
August 3, 1998
<PAGE>
STRATTON GROWTH FUND
- --------------------------------------------------------------------------------
Following an extraordinarily strong first quarter for the stock market, most
sectors of the market under-performed in the second quarter. The only
leadership was in the very large capitalization companies with market values in
excess of $20 billion and in the multi-national growth company names. These
have attracted substantial foreign buying as funds have flowed from
international sources to these narrow areas of the U.S. markets. The larger
number of mid-cap and value oriented names have suffered from neglect during
the second quarter.
We made relatively few changes in the portfolio, eliminating only one stock;
Phelps Dodge, because of growing concern about the impact of the Asian crisis.
We added four new names to your portfolio. The most significant additions were
two new holdings to the insurance sector raising that to 16% of the portfolio.
Ohio Casualty Corp. and SAFECO Corp. are both medium size property and casualty
companies that show up well on our value screens. We added Compass Bancshares
to our banking sector. This is a regional bank in the state of Alabama and fits
into the mold of companies that may be acquired by much larger institutions.
The most interesting new holding was Rubbermaid. This is a well-known consumer
product company that has suffered for the last five years by shrinking profit
margins. Part of this was due to much higher raw material costs and part of it
was due to lack of a clear management plan for the company. We believe their
problems have been corrected and that the company should show strong earnings
growth in the coming quarters as it gets back on the track of developing new
products to produce revenue growth. It seemed to be a "falling angel" among
well known consumer names which made it attractive for our purchase.
Our plan has been to build the financial and insurance sectors of our portfolio
together with consumer products and to reduce our positions in the more
cyclical business cycle sensitive companies. This reduces exposure to an Asian
led economic slowdown.
Our expense ratio continues to be reduced with the first six months showing an
improvement to 1.06%, which is a record low.
Total net assets were $65,887,783. Net asset value per share ended the quarter
at $36.14.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Growth Fund with all dividend income and capital gains distributions
reinvested.
LOGO
<TABLE>
<CAPTION>
5/31/96-
9/30/72 73-74 75-76 77-76 79-80 81-82 63-64 85-86 87-88 89-90 91-92 93-94 95-96 12/31/96*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10,000 7,630 11,280 14,155 14,597 17,299 24,755 38,310 30,774 31,059 32,464 32,622 42,938 42,654
45 43 458 1,217 2,147 3,703 6,347 10,805 11,062 14,859 21,871 26,652 41,919 44,981
- 0 0 0 0 0 0 3,857 10,945 22,901 27,527 35,156 60,327 66,844
12/31/97 6/30/98
<C> <C>
98,447 110,372
58,992 65,597
52,749 57,093
</TABLE>
Average Annual Total Return
for the period ended 6/30/98
1 year.............+ 29.51%
5 year.............+ 21.29
10 year.............+ 15.48
15 year.............+ 13.04
20 year.............+ 14.60
25 year.............+ 14.44
Past performance is not predictive of future performance.
*Prior to 12/31/96, SGF had a fiscal year-end of 5/31.
2
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Growth Fund
<TABLE>
<CAPTION>
JUNE 30, 1998 March 31, 1998
- -------------------------------------------------------
<S> <C> <C>
Total Net Assets $65,887,783 $66,549,019
- -------------------------------------------------------
Net Asset Value Per Share $36.14 $37.06
- -------------------------------------------------------
Shares Outstanding 1,823,272 1,795,560
- -------------------------------------------------------
Number of Shareholders 1,382 1,294
- -------------------------------------------------------
Average Size Account $47,676 $51,429
- -------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- --------------------------------------------------------
<S> <C>
Baxter International, Inc. American Express Co.
Compass Bancshares, Inc. (1) Chrysler Corp.
Ohio Casualty Corp. (1) CoreStates Financial Corp.
Rubbermaid, Inc. (1) Phelps Dodge Corp. NY (2)
SAFECO Corp. (1)
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- ------------------------------------------------------------
<S> <C> <C>
First Union Corp. $ 3,833,549 5.8%
- ------------------------------------------------------------
American General Corp. 3,559,375 5.4
- ------------------------------------------------------------
Commerce Bancorp, Inc. (NJ) 3,132,675 4.8
- ------------------------------------------------------------
Du Pont (E.I.) de Nemours & Co. 2,985,000 4.5
- ------------------------------------------------------------
Pitney Bowes, Inc. 2,887,500 4.4
- ------------------------------------------------------------
Chrysler Corp. 2,818,750 4.3
- ------------------------------------------------------------
PNC Bank Corp. 2,690,625 4.1
- ------------------------------------------------------------
American Express Co. 2,508,000 3.8
- ------------------------------------------------------------
Thomas & Betts Corp. 2,462,500 3.7
- ------------------------------------------------------------
Carpenter Technology Corp. 2,311,500 3.5
- ------------------------------------------------------------
$29,189,474 44.3%
- ------------------------------------------------------------
</TABLE>
3
<PAGE>
STRATTON MONTHLY DIVIDEND REIT SHARES
- --------------------------------------------------------------------------------
During the first six months, the Fund provided a total return of -2.19%; this
compares favorably with a total return for all Equity REITs tracked by the
National Association of Real Estate Investment Trusts (NAREIT) which was -
5.03%.
During the second quarter, we made only modest changes in our portfolio. We
sold shares of Camden Property that we received in the acquisition of our
holding of Oasis Residential Properties, because Camden shares provided a yield
that was too low for our portfolio. We also received shares of Excel Legacy
Corp., which was a spin-off from Excel Corp. This was a non dividend paying
stock that was engaged in development activities for Excel and had high risk to
potential earnings. We eliminated that and put the proceeds into more
conventional REITs. The two positions that we added to during the quarter were
Associated Estates Realty, a depressed Columbus, Ohio based apartment REIT and
Boykin Lodging, a depressed hotel REIT that is national in scope. Our total
portfolio turnover for the first six months was only 4.3%, which indicates
relative satisfaction with the sectors in which we are invested.
The leading industry continues to be shopping centers with 21.4% of our assets
followed by hotels and motels with 17.9% and apartments with 16.8%. Our cash
and liquidity is approximately 4.5%.
Despite the poor relative stock market performance of the REIT industry in the
first six months of 1998, the fundamentals remain overwhelmingly positive for
the entire industry. The current dividend yield on our portfolio is 8.10% with
a dividend payout ratio of just under 77% of Funds From Operations (FFO). We
expect FFO growth in 1998 to be about 10% with dividend growth to shareholders
in the 6-7% range. Our portfolio is selling at an average of 8.8x expected FFO
for 1999. This is in contrast to a price-earnings ratio in excess of 20 for the
Standard & Poor's 500 index.
Total net assets were $91,770,344. Net asset value per share ended the quarter
at $28.65.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Monthly Dividend REIT Shares with all dividend income and capital
gains distributions reinvested.
LOGO
<TABLE>
1/31/96-
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 12/31/96*
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9,113 9,354 10,808 10,667 11,795 14,604 16,320 13,181 12,824 12,861 12,084 14,609 15,701 15,060 13,039 14,383 14,399
583 1,641 3,107 4,379 6,627 10,328 13,744 13,041 15,044 17,513 19,388 26,570 31,818 33,590 32,499 39,890 43,821
$ - - - - - - 503 1,043 1,015 1,018 956 1,156 1,242 1,192 1,032 1,138 1,139
<CAPTION>
<S> <C>
12/31/97 6/30/98
15,879 15,039
52,959 52,332
1,257 1,190
</TABLE>
STRATTON MONTHLY DIVIDEND SHARES
Average Annual Total Return
for the period ended 6/30/98
1 year................... + 9.46%
5 year................... + 5.66
10 year................... + 9.26
15 year................... +10.81
Past performance is not predictive of future performance.
*Prior to 12/31/96, SMDS had a fiscal year-end of 1/31.
4
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
<TABLE>
<CAPTION>
JUNE 30, 1998 March 31, 1998
- -------------------------------------------------------
<S> <C> <C>
Total Net Assets $91,770,344 $98,467,974
- -------------------------------------------------------
Net Asset Value Per Share $28.65 $30.27
- -------------------------------------------------------
Shares Outstanding 3,203,338 3,253,148
- -------------------------------------------------------
Number of Shareholders 4,619 4,799
- -------------------------------------------------------
Average Size Account $19,868 $20,518
- -------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- ----------------------------------------------------------
<S> <C>
Associated Estates Realty Corp. Camden Property Trust (1)
Boykin Lodging Co. Excel Legacy Corp. (1)
Health Care REIT, Inc.
(1) Eliminations
</TABLE>
TEN LARGEST HOLDINGS JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value Percent of TNA
- -----------------------------------------------------------------
<S> <C> <C>
Health Care REIT, Inc. $ 3,825,000 4.2%
- -----------------------------------------------------------------
Mid-America Realty Investments, Inc. 3,390,000 3.7
- -----------------------------------------------------------------
Glimcher Realty Trust 3,207,188 3.5
- -----------------------------------------------------------------
Developers Diversified Realty Corp. 3,135,000 3.4
- -----------------------------------------------------------------
Tanger Factory Outlet Centers, Inc. 2,851,875 3.1
- -----------------------------------------------------------------
Mid-Atlantic Realty Trust 2,831,875 3.1
- -----------------------------------------------------------------
Kimco Realty Corp. 2,767,500 3.0
- -----------------------------------------------------------------
Gables Residential Trust 2,712,500 2.9
- -----------------------------------------------------------------
Excel Realty Trust, Inc. 2,604,375 2.8
- -----------------------------------------------------------------
Town & Country Trust 2,539,031 2.8
- -----------------------------------------------------------------
$29,864,344 32.5%
- -----------------------------------------------------------------
</TABLE>
5
<PAGE>
STRATTON SMALL-CAP YIELD FUND
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund is invested in dividend paying companies all of
which have total market capitalizations under $1 billion at the time of
purchase and which are outside of the S&P 500 Index. Currently, the average
market capitalization of the stocks in the portfolio is approximately $500
million. The current number of holdings is 65.
At the end of the quarter, the portfolio was 94.8% invested with the remaining
cash reserves held in commercial paper. Industrial and Banking remain our
largest sectors at 23.3% and 19.5%, respectively. Business services are 10.6%
while 7.8% of the portfolio is in dividend-paying technology stocks.
For the quarter, your Fund lost 5.5% while the Russell 2000 Small-Cap Index
lost 4.7%, as small cap growth stocks continued to outperform small cap value.
For the trailing twelve months your Fund is up 21.7% versus 16.5% for the
Russell 2000. We had another bank takeover during this quarter--Trans Financial
is being acquired by Star Banc Corp. of Ohio. As we enter the third quarter the
stock market continues to be dominated by a narrow leadership of large cap
growth names. Market breadth has become increasingly negative. Despite the
negative sentiment, we remain confident that when this "nifty fifty" period is
over small cap stocks will again outperform the indices.
The Fund's Directors declared the regular second fiscal quarter dividend at the
rate of $0.04 per share and a long-term capital gains distribution of $0.04 per
share. These distributions were payable on June 22 to stockholders of record as
of June 12, 1998.
Total net assets at month-end were $55,293,239. Net asset value per share ended
the quarter at $22.83.
The graph below illustrates the increase in value of a $10,000 investment in
Stratton Small-Cap Yield Fund with all dividend income and capital gains
distributions reinvested.
LOGO
<TABLE>
3/31/96-
4/12/93 4-93 3/31/94 3/31/95 3/31/96 12/31/96* 12/31/97 6/30/98
<S> <C> <C> <C> <C> <C> <C> <C>
10,000 10,000 10,376 10,352 12,780 13,432 17,976 18,264
- - - 158 402 789 1,067 1,633 1,763
- - - - - - 813 2,190 2,265
</TABLE>
Average Annual Total Return
for the period ended 6/30/98
1 year.................... +21.69%
3 year.................... +24.81
5 year.................... +17.08
Past performace is not predictive of future performance.
*Prior to 12/31/96, SSCY had a fiscal year-end of 3/31.
6
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
JUNE 30, 1998 March 31, 1998
- -------------------------------------------------------
<S> <C> <C>
Total Net Assets $55,293,239 $56,693,959
- -------------------------------------------------------
Net Asset Value Per Share $22.83 $24.23
- -------------------------------------------------------
Shares Outstanding 2,422,063 2,339,372
- -------------------------------------------------------
Number of Shareholders 2,011 1,826
- -------------------------------------------------------
Average Size Account $27,495 $31,048
- -------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- -----------------------------------------------------------------
<S> <C>
Boston Acoustics, Inc. Defiance, Inc.
Commercial Intertech Corp. K2, Inc. (2)
Dain Rauscher Corp. Sovereign Bancorp, Inc.
Excel Industries, Inc. Standard Motor Products, Inc. (2)
International Multifoods Corp. West Co., Inc. (2)
Kuhlman Corp. Wireless Telecom Group, Inc. (2)
LSI Industries, Inc.
Ocean Financial Corp. (1)
Tasty Baking Co.
TB Wood's Corp.
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET VALUE PERCENT OF TNA
- --------------------------------------------------------------------
<S> <C> <C>
Boston Acoustics, Inc. $ 1,727,250 3.1%
- --------------------------------------------------------------------
Primex Technologies, Inc. 1,609,250 2.9
- --------------------------------------------------------------------
A.O. Smith Corp. 1,447,250 2.6
- --------------------------------------------------------------------
American Heritage Life Investment Corp. 1,433,750 2.6
- --------------------------------------------------------------------
Eaton Vance Corp. 1,389,375 2.5
- --------------------------------------------------------------------
Kuhlman Corp. 1,384,687 2.5
- --------------------------------------------------------------------
Dain Rauscher Corp. 1,314,000 2.4
- --------------------------------------------------------------------
Wackenhut Corp. Class B 1,290,000 2.3
- --------------------------------------------------------------------
Commercial Intertech Corp. 1,268,750 2.3
- --------------------------------------------------------------------
Riviana Foods, Inc. (DE) 1,268,437 2.3
- --------------------------------------------------------------------
$14,132,749 25.5%
- --------------------------------------------------------------------
</TABLE>
7
<PAGE>
STRATTON SPECIAL VALUE FUND
- --------------------------------------------------------------------------------
The Stratton Special Value Fund posted a total return of 2.1% in the second
quarter, bringing the return for the six months ended June 30, 1998 to 14.8%.
This performance compares quite favorably to the Russell 2000 index, which
generated a return of 4.9% for the first six months. The Fund focuses on under
researched, less well-known companies, which the Investment Advisor considers
to be selling at below average valuations of estimated future earnings and cash
flow. The average market capitalization of the investments is $352 million and
many of the holdings are micro-cap issues, which tend to be under-researched by
Wall Street analysts. As these companies grow and become more visible, they
should realize more generous stock market valuations.
At the end of June, the portfolio was 97.9% invested in 66 companies. Reviewing
the equity holdings, the largest investments are in the Consumer Products
(19.5%), Construction (15.1%), Insurance/Services (11.9%), Metals (8.5%) and
Capital Goods/Technology (7.3%) areas. The ten largest investments represent
23.1% of the Fund's total net assets and many of the holdings are direct
beneficiaries of the current low interest rate environment. The portfolio
appears very under-valued with an average price/earnings ratio of only eleven
times next years earnings versus a price earnings ratio of over twenty-three
for the S&P 500 index.
The Fund did not engage in any short sales or options transactions during the
first half of the year.
Total net assets were $7,220,520 at mid-year and the net asset value per share
stood at $17.22. A hypothetical $10,000 investment on 12/31/97 would have grown
to $11,480.
8
<PAGE>
FUND HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Special Value Fund
<TABLE>
<CAPTION>
JUNE 30, 1998 March 31, 1998
- -------------------------------------------------------
<S> <C> <C>
Total Net Assets $7,220,520 $5,712,552
- -------------------------------------------------------
Net Asset Value Per Share $17.22 $16.87
- -------------------------------------------------------
Shares Outstanding 419,363 338,539
- -------------------------------------------------------
Number of Shareholders 50 36
- -------------------------------------------------------
Average Size Account $144,410 $158,682
- -------------------------------------------------------
</TABLE>
PORTFOLIO CHANGES FOR THE QUARTER ENDED JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAJOR PURCHASES MAJOR SALES
- ---------------------------------------------------------------------------
<S> <C>
Applied Signal Technology, Inc. (1) American Locker Group, Inc. (2)
Callaway Golf Co. Anchor Gaming (2)
Cracker Barrel Old Country Store, Inc. (1) Churchill Downs, Inc.
Featherlite, Inc. (1) Dawson Geophysical Co. (2)
Giant Cement Holding, Inc. (1) Medusa Corp.
Northwest Pipe Co. (1) NCI Building Systems, Inc.
SIFCO Industries, Inc. RFS Hotel Investors, Inc. (2)
Unico American Corp. (1) Stanley Furniture, Inc. (2)
Valassis Communications, Inc. (1) Vari-L Company, Inc. (2)
WD-40 Co. Winsloew Furniture, Inc. (2)
(1) New Holdings (2) Eliminations
</TABLE>
TEN LARGEST HOLDINGS JUNE 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET VALUE PERCENT OF TNA
- ------------------------------------------------------------------
<S> <C> <C>
Velcro Industries, N.V. $ 194,950 2.7%
- ------------------------------------------------------------------
Donegal Group, Inc. 190,000 2.6
- ------------------------------------------------------------------
Crossmann Communities, Inc. 176,175 2.4
- ------------------------------------------------------------------
LandAmerica Financial Group, Inc. 171,750 2.4
- ------------------------------------------------------------------
WD-40 Co. 162,750 2.3
- ------------------------------------------------------------------
Safety Components International, Inc. 159,750 2.2
- ------------------------------------------------------------------
SIFCO Industries, Inc. 158,438 2.2
- ------------------------------------------------------------------
Duckwall-ALCO Stores, Inc. 157,500 2.2
- ------------------------------------------------------------------
Drew Industries, Inc. 149,375 2.1
- ------------------------------------------------------------------
NCI Building Systems, Inc. 144,375 2.0
- ------------------------------------------------------------------
$1,665,063 23.1%
- ------------------------------------------------------------------
</TABLE>
9
<PAGE>
STRATTON GROWTH FUND
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The primary objective of SGF is to seek possible growth of capital for its
shareholders' investments with current income from interest and dividends as a
secondary objective. The Fund's investments will normally consist of common
stock and securities convertible into common stock.
WHAT IS THE INVESTMENT PHILOSOPHY USED IN MANAGING THE FUND?
Our in-house research of historical data shows that investing in high yielding
common stocks has produced above-average returns while lowering risk and
preserving capital. For Stratton Management Co., the common stock yield is the
primary screen in sorting out the equity stocks that are available. We then
look at additional yield characteristics such as dividend growth rates and
dividend coverage. Finally, we conduct fundamental analysis of important
characteristics such as the earnings and cash flow outlook, management
strengths, and industry competitive position.
WHY ARE DIVIDEND PAYING COMPANIES SO IMPORTANT TO THE FUND'S PORTFOLIO?
Stocks of companies that pay above average dividends tend to be less volatile
than companies that do not distribute dividends to shareholders. Though stock
prices do vary over time, dividend payouts tend to be very consistent. We find
that companies which consistently strive to increase their dividends tend to
offer the potential of above average returns. Steady, stable growth of
principal and dividend income is what SGF hopes to achieve.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. Average gross portfolio yield target should exceed the S&P 500 by more than
50%.
. Approximately 35 companies are held.
. By combining high dividend yield and underlying low price volatility (Beta),
SGF should have the potential to produce good relative performance in up
markets and superior relative performance in down markets.
10
<PAGE>
STRATTON MONTHLY DIVIDEND REIT SHARES
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The primary objective of SMDS is to seek a high rate of return from dividend
and interest income on its investments in common stock and securities
convertible into common stock. In order to achieve these goals, the Fund
invests substantially all of its assets in high income-producing U.S. equity
securities.
WHAT IS THE INVESTMENT PHILOSOPHY USED IN MANAGING THE FUND?
The Fund is managed to provide a high level of monthly income to its
shareholders and, therefore, looks for companies that have strong dividend
payouts. Currently, 80% or more of the Fund is invested in high dividend paying
REIT's. There are several types of real estate properties that are owned by
REIT's, including multifamily apartment complexes, health care facilities,
shopping centers, regional malls, office centers, hotels, and industrial
buildings. The portfolio is diversified across several sectors within the REIT
industry.
WHY ARE DIVIDEND PAYING COMPANIES SO IMPORTANT TO THE FUND'S PORTFOLIO?
Current income is paramount for the SMDS portfolio. The Fund needs higher
yielding securities to maintain its own attractive dividend payout. REITs
satisfy this income requirement, while also offering the potential for dividend
growth and capital appreciation. REITs must distribute 95% of their net
investment income, so, as the earnings of these companies grow, increases in
dividends should follow.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. The portfolio is comprised of high dividend paying securities.
. Approximately 40 companies are held.
. SMDS is managed to provide a high level of current monthly income, and to
offer the potential for long-term capital appreciation.
11
<PAGE>
STRATTON SMALL-CAP YIELD FUND
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The primary objective of SSCY is to achieve both dividend income and capital
appreciation. In order to achieve these goals, the Fund invests in equity
securities, primarily common stock, and securities convertible into common
stock, of companies with total market capitalizations at the time of investment
of less than $1 billion and which are outside the S&P 500 Index. We attempt to
purchase companies whose recent and future earnings power give them the
potential for higher valuations and continued dividend growth.
WHAT IS THE INVESTMENT PHILOSOPHY USED IN MANAGING THE FUND?
This all equity mutual fund invests in the common stocks of small but
established dividend paying companies. The initial screen for stock selection
requires that a stock yields greater than the Small Cap average as measured by
the Russell 2000 Index. We then employ a three step process which focuses on a
stock's fundamental valuation, earnings prospects, and, as a confirming factor,
relative price strength. We feel that companies that exhibit consistent
earnings and that regularly increase their dividends have superior appreciation
potential with reasonable levels of risk.
WHY ARE DIVIDEND PAYING COMPANIES SO IMPORTANT TO THE FUND'S PORTFOLIO?
Our research has shown that dividends tend to dampen stock price volatility.
Small-cap companies that pay dividends tend to have strong financial
characteristics since the quarterly dividend payout requires managements to
exhibit a high degree of financial discipline. The combination of strong
earnings growth and superior earnings stability are crucial elements in meeting
SSCY'S investment objectives.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. Average gross portfolio yield target should exceed the S&P 500 and be
approximately twice the yield of the average small-cap company.
. Approximately 65 companies are held.
. By combining high dividend yields and underlying low price volatility (Beta),
SSCY seeks to produce good relative performance in up markets and superior
relative performance in down markets.
12
<PAGE>
STRATTON SPECIAL VALUE FUND
- --------------------------------------------------------------------------------
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The primary objective of SSVF is capital appreciation. The Fund invests in
equity securities, primarily common stock, and securities convertible into or
exchangeable for common stock which represent a value or potential worth which
is not fully recognized by prevailing market prices. These stocks are
considered by the Investment Advisor to be under-researched as measured by the
professional, financial research analysts covering them.
WHAT IS THE INVESTMENT PHILOSOPHY USED IN MANAGING THE FUND?
The investment advisor employs a "value" approach to the Fund's investments,
seeking to identify companies that have experienced fundamental change, are
intrinsically undervalued or are misunderstood by the investment community. We
examine various factors in determining the value characteristics of securities
including, but not limited to, ratios of price to cash flow, price to sales,
price to book, price to revenue and price to earnings. We will also seek out
companies in which there is a large disparity between its market value and our
estimate of its earnings power, assets, or private market value.
WHAT TYPES OF COMPANIES WILL BE CONSIDERED FOR PURCHASE?
The Fund seeks to achieve superior total returns by employing multiple
strategies which include: investing in micro-cap companies, which tend to be
undiscovered and under-researched by Wall Street analysts; investing in under-
valued large cap companies; and participating in initial public offerings.
WHAT ARE THE PRIMARY INVESTMENT CHARACTERISTICS OF THE PORTFOLIO?
. The Fund strives to exploit developing investment opportunities across both
the large and small cap sectors of the market.
. Portfolio turnover may be above-average as the fund manager will attempt to
respond rapidly to changing market conditions.
. SSVF has an aggressive investment policy and as a result, is designed as one
part of a complete investment program.
13
<PAGE>
SCHEDULE OF INVESTMENTS June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
Stratton Growth Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- ----------
<S> <C> <C>
COMMON STOCKS - 91.2%
BANKING/FINANCIAL - 24.2%
Banc One Corp. ........................................... 28,160 $1,571,680
Comerica, Inc. ........................................... 22,500 1,490,625
Commerce Bancorp, Inc. (NJ)............................... 53,550 3,132,675
Compass Bancshares, Inc. ................................. 20,000 902,500
First Union Corp. ........................................ 65,812 3,833,549
PNC Bank Corp. ........................................... 50,000 2,690,625
Summit Bancorp, Inc. ..................................... 30,000 1,425,000
Union Planters Corp. ..................................... 15,000 882,187
----------
15,928,841
----------
BUSINESS SERVICES - 9.3%
American Express Co. ..................................... 22,000 2,508,000
Gallagher (Arthur J.) & Co. .............................. 16,000 716,000
Pitney Bowes, Inc. ....................................... 60,000 2,887,500
----------
6,111,500
----------
CAPITAL GOODS/TECHNOLOGY - 6.4%
Harris Corp. ............................................. 40,000 1,787,500
Thomas & Betts Corp. ..................................... 50,000 2,462,500
----------
4,250,000
----------
CHEMICAL - 7.7%
Du Pont (E.I.) de Nemours & Co. .......................... 40,000 2,985,000
Olin Corp. ............................................... 50,000 2,084,375
----------
5,069,375
----------
CONSUMER PRODUCTS - 9.1%
Chrysler Corp. ........................................... 50,000 2,818,750
Kimberly-Clark Corp. ..................................... 38,000 1,743,250
Rubbermaid, Inc. ......................................... 15,000 497,813
Springs Industries, Inc. Class A.......................... 20,000 922,500
----------
5,982,313
----------
ENERGY - 4.0%
El Paso Energy Corp. ..................................... 20,000 765,000
Mobil Corp. .............................................. 24,000 1,839,000
----------
2,604,000
----------
HEALTH CARE - 4.8%
American Home Products Corp. ............................. 26,000 1,345,500
Baxter International, Inc. ............................... 20,000 1,076,250
Shared Medical Systems Corp. ............................. 10,000 734,375
----------
3,156,125
----------
INDUSTRIAL - 3.7%
Cooper Industries, Inc. .................................. 15,000 824,063
Fleetwood Enterprises, Inc. .............................. 40,000 1,600,000
----------
2,424,063
----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
---------- -----------
<S> <C> <C>
INSURANCE/SERVICES - 16.0%
American General Corp. ............................... 50,000 $ 3,559,375
Aon Corp. ............................................ 22,500 1,580,625
HSB Group, Inc. ...................................... 22,500 1,203,750
Jefferson-Pilot Corp. ................................ 7,500 434,531
Lincoln National Corp. ............................... 20,000 1,827,500
Ohio Casualty Corp. .................................. 10,000 442,500
SAFECO Corp. ......................................... 10,000 454,375
Unitrin, Inc. ........................................ 15,000 1,042,500
-----------
10,545,156
-----------
METALS - 3.5%
Carpenter Technology Corp. ........................... 46,000 2,311,500
-----------
PAPER - 1.4%
Glatfelter (P.H.) Co. ................................ 60,000 948,750
-----------
RETAILING--1.1%
Penney (J.C.) Co., Inc. .............................. 10,000 723,125
-----------
Total Common Stocks
(cost $31,515,545)................................... 60,054,748
-----------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C>
SHORT-TERM NOTES - 10.0%
Associates Corp. of North America
5.41% due 07/02/98................................... $2,367,000 2,367,000
General Motors Acceptance Corp.
5.59% due 07/08/98................................... 2,425,000 2,425,000
Ford Motor Credit Co.
5.56% due 07/13/98................................... 1,800,000 1,800,000
-----------
Total Short-Term Notes
(cost $6,592,000).................................... 6,592,000
-----------
TOTAL INVESTMENTS - 101.2%
(cost $38,107,545*).................................. 66,646,748
LIABILITIES IN EXCESS OF CASH AND OTHER ASSETS--
(1.2%)............................................... (758,965)
-----------
NET ASSETS - 100.00%.................................. $65,887,783
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $38,107,545; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C> <C>
Gross unrealized
appreciation.... $28,713,155
Gross unrealized
depreciation.... (173,952)
-----------
Net unrealized
appreciation... $28,539,203
===========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
SCHEDULE OF INVESTMENTS June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 93.0%
APARTMENTS - 16.8%
Associated Estates Realty Corp............................ 60,000 $ 1,121,250
Berkshire Realty Co., Inc................................. 150,000 1,753,125
Cornerstone Realty Income
Trust, Inc............................................... 130,000 1,486,875
Gables Residential Trust.................................. 100,000 2,712,500
Home Properties of New York, Inc.......................... 85,000 2,268,437
Mid-America Apartment Communities, Inc.................... 60,000 1,578,750
Town & Country Trust...................................... 153,300 2,539,031
Walden Residential Properties, Inc........................ 80,000 1,960,000
-----------
15,419,968
-----------
DIVERSIFIED - 7.2%
Colonial Properties Trust................................. 80,000 2,480,000
EastGroup Properties, SBI................................. 125,000 2,507,812
Pacific Gulf Properties, Inc.............................. 75,000 1,598,438
-----------
6,586,250
-----------
HEALTH CARE - 11.4%
American Health Properties, Inc........................... 95,000 2,375,000
Health & Retirement Properties Trust...................... 90,000 1,693,125
Health Care REIT, Inc..................................... 150,000 3,825,000
LTC Properties, Inc....................................... 70,000 1,303,750
Universal Health Realty Income Trust...................... 65,000 1,300,000
-----------
10,496,875
-----------
HOTELS/MOTELS - 17.9%
Boykin Lodging Co......................................... 85,000 1,843,438
Equity Inns, Inc.......................................... 190,000 2,505,625
Hospitality Properties Trust.............................. 60,000 1,927,500
Innkeepers USA Trust...................................... 170,000 2,146,250
Jameson Inns, Inc......................................... 160,000 1,760,000
RFS Hotel Investors, Inc.................................. 125,000 2,375,000
Sunstone Hotel Investors, Inc............................. 130,000 1,730,625
Winston Hotels, Inc....................................... 175,000 2,187,500
-----------
16,475,938
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
OFFICE/INDUSTRIAL - 8.9%
Commercial Net Lease Realty, Inc.......................... 90,000 $ 1,456,875
First Industrial Realty Trust, Inc........................ 50,000 1,587,500
Liberty Property Trust.................................... 85,000 2,172,813
Tower Realty Trust, Inc................................... 70,000 1,566,250
TriNet Corporate Realty Trust, Inc........................ 40,000 1,360,000
-----------
8,143,438
-----------
OUTLET CENTERS - 4.4%
Mills Corp................................................ 48,700 1,168,800
Tanger Factory Outlet Centers, Inc........................ 90,000 2,851,875
-----------
4,020,675
-----------
REGIONAL MALLS - 3.7%
Mid-America Realty Investments, Inc....................... 339,000 3,390,000
-----------
SHOPPING CENTERS - 21.4%
Bradley Real Estate, Inc.................................. 85,000 1,795,625
Developers Diversified Realty Corp........................ 80,000 3,135,000
Excel Realty Trust, Inc................................... 90,000 2,604,375
Glimcher Realty Trust..................................... 165,000 3,207,187
IRT Property Co........................................... 166,000 1,826,000
Kimco Realty Corp. ....................................... 67,500 2,767,500
Mid-Atlantic Realty Trust................................. 230,000 2,831,875
Western Investment Real Estate Trust...................... 110,000 1,505,625
-----------
19,673,187
-----------
STORAGE - 1.3%
Storage Trust Realty...................................... 50,000 1,168,750
-----------
Total Common Stocks
(cost $78,625,672)....................................... 85,375,081
-----------
PREFERRED STOCKS - 2.5%
Psychiatric Group Preferred
Depositary Shares........................................ 100,000 1,600,000
Kimco Realty Corp.--Depositary Shares Class D............. 24,300 651,544
-----------
Total Preferred Stocks
(cost $2,113,413)........................................ 2,251,544
-----------
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
SCHEDULE OF INVESTMENTS June 30, 1998 (unaudited) (continued)
- --------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
<TABLE>
<CAPTION>
MARKET
PRINCIPAL VALUE
AMOUNT (NOTE 1)
---------- -----------
<S> <C> <C>
SHORT-TERM NOTES - 3.9%
American Express Credit Corp.
5.65% due 07/01/98..................................... $ 885,000 $ 885,000
American Express Credit Corp.
6.02% due 07/02/98..................................... 1,610,000 1,610,000
American Express Credit Corp.
5.68% due 07/06/98..................................... 1,105,000 1,105,000
-----------
Total Short-Term Notes
(cost $3,600,000)...................................... 3,600,000
-----------
TOTAL INVESTMENTS--99.4%
(cost $84,339,085*).................................... 91,226,625
CASH AND OTHER ASSETS
LESS LIABILITIES--0.6%................................. 543,719
-----------
NET ASSETS - 100.00%.................................... $91,770,344
===========
- --------
* Aggregate cost for federal income tax purposes is $84,339,085; and net
unrealized appreciation is as follows:
Gross unrealized appreciation...................................... $ 8,528,872
Gross unrealized depreciation...................................... (1,641,332)
-----------
Net unrealized appreciation....................................... $ 6,887,540
===========
</TABLE>
See accompanying notes to financial statements.
16
<PAGE>
SCHEDULE OF INVESTMENTS June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
COMMON STOCKS - 94.8%
BANKING/FINANCIAL - 19.5%
American Bank of Connecticut............................. 22,000 $ 599,500
Centura Banks, Inc. (NC)................................. 8,000 500,000
Colonial BancGroup, Inc. ................................ 15,000 483,750
Commerce Bancorp, Inc. (NJ).............................. 15,750 921,375
Community Bank Systems, Inc. ............................ 17,000 532,312
First Essex Bancorp, Inc. ............................... 25,000 559,375
First Financial Holdings, Inc. .......................... 18,000 427,500
Firstbank of Illinois Co. ............................... 6,750 283,500
JeffBanks, Inc. ......................................... 16,000 786,000
Medford Bancorp, Inc. ................................... 13,000 533,000
Ocean Financial Corp. ................................... 34,000 650,250
Peoples Heritage Financial
Group, Inc. ............................................ 25,346 598,799
Reliance Bancorp, Inc. .................................. 18,000 689,625
Republic Banking Corp. of Florida........................ 30,000 480,000
SIS Bancorp, Inc. ....................................... 15,000 581,250
Sovereign Bancorp, Inc. ................................. 18,000 294,187
Trans Financial, Inc. ................................... 15,000 860,625
Vermont Financial Services Corp. ........................ 16,000 439,000
Webster Financial Corp. ................................. 16,632 553,014
-----------
10,773,062
-----------
BUSINESS SERVICES - 10.6%
Dain Rauscher Corp. ..................................... 24,000 1,314,000
Eaton Vance Corp. ....................................... 30,000 1,389,375
Primesource Corp. ....................................... 90,000 810,000
Rollins Truck Leasing Corp. ............................. 3,100 38,944
Schawk, Inc. ............................................ 10,000 150,000
True North Communications, Inc. ......................... 30,000 877,500
Wackenhut Corp. Class B.................................. 60,000 1,290,000
-----------
5,869,819
-----------
CHEMICAL - 6.9%
LeaRonal, Inc. .......................................... 40,000 955,000
Primex Technologies, Inc. ............................... 31,400 1,609,250
Quaker Chemical Corp. ................................... 65,000 1,230,937
-----------
3,795,187
-----------
CONSUMER DURABLES - 4.4%
Hunt Corp. .............................................. 50,000 1,184,375
TB Wood's Corp. ......................................... 60,000 1,260,000
-----------
2,444,375
-----------
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- -----------
<S> <C> <C>
CONSUMER NON-DURABLES - 9.0%
Guilford Mills, Inc. .................................... 46,000 $ 920,000
International Multifoods Corp. .......................... 40,000 1,100,000
Riviana Foods, Inc. (DE)................................. 55,000 1,268,437
Tasty Baking Co. ........................................ 55,000 855,938
Velcro Industries, N.V................................... 6,000 835,500
-----------
4,979,875
-----------
HEALTH CARE - 2.1%
Morrison Health Care, Inc. .............................. 28,200 521,700
Shared Medical Systems Corp. ............................ 9,000 660,938
-----------
1,182,638
-----------
INDUSTRIAL - 23.3%
A.O. Smith Corp. ........................................ 28,000 1,447,250
Carpenter Technology Corp. .............................. 24,500 1,231,125
Commercial Intertech Corp. .............................. 70,000 1,268,750
Defiance, Inc. .......................................... 40,000 340,000
Excel Industries, Inc. .................................. 60,000 858,750
Florida Rock Industries, Inc. ........................... 40,000 1,167,500
Greenbrier Companies, Inc. .............................. 73,000 1,259,250
Kuhlman Corp. ........................................... 35,000 1,384,687
LSI Industries, Inc. .................................... 45,000 900,000
Quanex Corp. ............................................ 40,000 1,212,500
Republic Group, Inc. .................................... 45,000 945,000
Roanoke Electric Steel Corp. ............................ 48,000 900,000
-----------
12,914,812
-----------
INSURANCE/SERVICES - 6.6%
American Heritage Life
Investment Corp. ....................................... 62,000 1,433,750
Donegal Group, Inc. ..................................... 46,667 875,000
Mobile America Corp. (FL)................................ 70,000 682,500
Selective Insurance Group, Inc. ......................... 30,000 672,186
-----------
3,663,436
-----------
REAL ESTATE - 4.6%
Brandywine Realty Trust.................................. 16,000 358,000
CCA Prison Realty Trust.................................. 25,000 765,625
Chateau Communities, Inc. ............................... 9,378 269,618
Colonial Properties Trust................................ 8,000 248,000
EastGroup Properties, SBI................................ 10,000 200,625
Innkeepers USA Trust..................................... 20,000 252,500
Parkway Properties, Inc. ................................ 15,000 442,500
-----------
2,536,868
-----------
</TABLE>
See accompanying notes to financial statements.
17
<PAGE>
SCHEDULE OF INVESTMENTS June 30, 1998 (unaudited) (continued)
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
---------- -----------
<S> <C> <C>
TECHNOLOGY - 7.8%
Boston Acoustics, Inc. ................................. 47,000 $ 1,727,250
Helix Technology Corp. ................................. 50,000 750,000
Marc, Inc. ............................................. 37,500 618,750
Technitrol, Inc. ....................................... 30,000 1,198,125
-----------
4,294,125
-----------
Total Common Stocks
(cost $39,259,944)..................................... 52,454,197
-----------
<CAPTION>
PRINCIPAL
AMOUNT
----------
<S> <C> <C>
SHORT-TERM NOTES - 4.4%
(cost $2,423,000)
American Express Credit Corp.
6.02% due 7/02/98...................................... $2,423,000 2,423,000
-----------
TOTAL INVESTMENTS - 99.2%
(cost $41,682,944*).................................... 54,877,197
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.8%................................ 416,042
-----------
NET ASSETS - 100.00%.................................... $55,293,239
===========
</TABLE>
- --------
* Aggregate cost for federal income tax purposes is $41,682,944; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation...................................... $14,412,502
Gross unrealized depreciation...................................... (1,218,249)
-----------
Net unrealized appreciation....................................... $13,194,253
===========
</TABLE>
See accompanying notes to financial statements.
18
<PAGE>
SCHEDULE OF INVESTMENTS June 30, 1998 (unaudited)
- --------------------------------------------------------------------------------
Stratton Special Value Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- ----------
<S> <C> <C>
COMMON STOCKS - 97.9%
AUTOMOTIVE - 5.8%
Featherlite, Inc.*........................................ 12,000 $ 144,000
Motorcar Parts & Accessories, Inc.*....................... 8,000 118,000
Safety Components
International, Inc.*..................................... 9,000 159,750
----------
421,750
----------
BANKING/FINANCIAL - 0.9%
Hanmi Bank................................................ 3,225 63,694
----------
BUSINESS SERVICES - 2.1%
Gallagher (Arthur J.) & Co. .............................. 1,200 53,700
Valassis Communications, Inc.*............................ 2,500 96,406
----------
150,106
----------
CAPITAL GOODS - 1.8%
Chicago Rivet & Machine Co. .............................. 4,000 132,500
----------
CAPITAL GOODS/TECHNOLOGY - 7.1%
Bel Fuse, Inc.*........................................... 6,000 133,500
Percon, Inc.*............................................. 10,000 104,375
SIFCO Industries, Inc. ................................... 7,500 158,438
Specialty Equipment
Companies, Inc.*......................................... 5,200 117,650
----------
513,963
----------
CONSTRUCTION - 15.1%
Ameron International Corp. ............................... 2,200 127,187
Crossman Communities, Inc.*............................... 5,800 176,175
Dominion Homes, Inc.*..................................... 4,500 65,250
Drew Industries, Inc.*.................................... 10,000 149,375
Engle Homes, Inc. ........................................ 7,000 109,375
Giant Cement Holding, Inc.*............................... 3,000 85,875
M/I Schottenstein Homes, Inc.............................. 5,400 116,775
NCI Building Systems, Inc.*............................... 2,500 144,375
Texas Industries, Inc. ................................... 2,200 116,600
----------
1,090,987
----------
CONSUMER PRODUCTS - 19.5%
American Woodmark Corp. .................................. 4,500 123,187
Ballantyne of Omaha, Inc.*................................ 9,000 75,375
Boston Acoustics, Inc. ................................... 3,000 110,250
Bush Industries, Inc. .................................... 2,500 54,375
Callaway Golf Co. ........................................ 6,000 118,125
Cannondale Corp.*......................................... 4,500 60,187
Coast Distribution System*................................ 18,000 66,375
Cracker Barrel Old County
Store, Inc. ............................................. 3,300 104,775
Decorator Industries, Inc. ............................... 3,000 39,000
Koss Corp.*............................................... 12,000 121,500
</TABLE>
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- ----------
<S> <C> <C>
LaCrosse Footwear, Inc. .................................. 5,000 $ 57,500
Sturm, Ruger & Co., Inc. ................................. 7,000 117,250
Velcro Industries, N.V. .................................. 1,400 194,950
WD-40 Co. ................................................ 6,000 162,750
----------
1,405,599
----------
CONSUMER SERVICES - 0.9%
Shuffle Master, Inc.*..................................... 7,000 63,875
----------
DISTRIBUTION - 1.9%
Bell Industries, Inc. .................................... 5,500 62,563
Richey Electronics, Inc.*................................. 10,000 78,125
----------
140,688
----------
ENERGY - 2.0%
HVIDE Marine, Inc. Class A*............................... 5,300 71,881
Ultramar Diamond Shamrock Corp. .......................... 2,300 72,594
----------
144,475
----------
ENTERTAINMENT - 3.3%
Churchill Downs, Inc. .................................... 3,000 124,500
Jackpot Enterprises, Inc. ................................ 9,000 113,063
----------
237,563
----------
INDUSTRIAL - 5.9%
Cascade Corp. ............................................ 5,700 104,025
Lufkin Industries, Inc. .................................. 3,500 115,500
Raven Industries, Inc. ................................... 7,000 133,875
SEACOR SMIT, Inc.*........................................ 1,200 73,575
----------
426,975
----------
INSURANCE/SERVICES - 11.9%
Acceptance Insurance
Companies, Inc.*......................................... 3,500 85,969
Donegal Group, Inc. ...................................... 10,133 190,000
LandAmerica Financial Group, Inc. ........................ 3,000 171,750
Mobile America Corp. (FL)................................. 10,500 102,375
Motor Club of America..................................... 7,000 106,750
Trenwick Group, Inc. ..................................... 2,000 77,687
Unico American Corp. ..................................... 8,000 121,000
----------
855,531
----------
METALS - 8.5%
Lindberg Corp. ........................................... 7,000 136,500
Northwest Pipe Co.*....................................... 5,000 117,500
Penn Engineering &
Manufacturing Corp. ..................................... 4,200 103,425
RMI Titanium Co. ......................................... 6,300 143,325
Special Metals Corp.*..................................... 8,000 112,000
----------
612,750
----------
</TABLE>
See accompanying notes to financial statements.
19
<PAGE>
SCHEDULE OF INVESTMENTS June 30, 1998 (unaudited) (continued)
- --------------------------------------------------------------------------------
Stratton Special Value Fund
<TABLE>
<CAPTION>
MARKET
NUMBER OF VALUE
SHARES (NOTE 1)
--------- ----------
<S> <C> <C>
REAL ESTATE - 0.9%
Sunstone Hotel Investors, Inc. ........................... 5,000 $ 66,562
----------
RETAILING - 2.6%
Duckwall-ALCO Stores, Inc.*............................... 9,000 157,500
Hampshire Group Ltd.*..................................... 1,500 32,438
----------
189,938
----------
TECHNOLOGY - 5.5%
Esterline Technologies Corp.*............................. 7,000 143,938
Hummingbird
Communications, Ltd.*.................................... 2,600 69,550
Trimble Navigation, Ltd.*................................. 7,000 113,312
Vertex Communications Corp.*.............................. 3,000 70,500
----------
397,300
----------
TELECOMMUNICATIONS - 2.2%
Applied Signal Technology, Inc.*.......................... 7,500 89,063
Hickory Tech Corp. ....................................... 1,700 67,575
----------
156,638
----------
TOTAL INVESTMENTS - 97.9%
(cost $6,963,425**)...................................... 7,070,894
CASH AND OTHER ASSETS
LESS LIABILITIES - 2.1%.................................. 149,626
----------
NET ASSETS - 100.00%...................................... $7,220,520
==========
</TABLE>
- --------
* non-income producing
** Aggregate cost for federal income tax purposes is $6,963,425; and net
unrealized appreciation is as follows:
<TABLE>
<S> <C>
Gross unrealized appreciation........................................ $ 554,224
Gross unrealized depreciation........................................ (446,755)
---------
Net unrealized appreciation......................................... $ 107,469
=========
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
June 30, 1998 (unaudited)
<TABLE>
<CAPTION>
SGF SMDS SSCY SSVF*
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities
at value (cost
$38,107,545, $84,339,085,
$41,682,944 and
$6,963,425, respectively)
(Note 1).................. $66,646,748 $91,226,625 $54,877,197 $7,070,894
Cash....................... 73,913 4,768 85,149 103,514
Dividends and interest
receivable................ 85,406 556,198 67,491 2,577
Receivable for securities
sold...................... -- -- 330,924 65,998
Prepaid expenses........... 3,797 -- -- --
----------- ----------- ----------- ----------
Total Assets............. 66,809,864 91,787,591 55,360,761 7,242,983
----------- ----------- ----------- ----------
LIABILITIES:
Accrued expenses and other
liabilities............... 12,769 17,247 28,617 --
Payable for investment
securities purchased...... 909,312 -- 38,905 22,463
----------- ----------- ----------- ----------
Total Liabilities........ 922,081 17,247 67,522 22,463
----------- ----------- ----------- ----------
NET ASSETS:
Applicable to 1,823,272,
3,203,338, 2,422,063 and
419,363 shares
outstanding,
respectively/1/........... $65,887,783 $91,770,344 $55,293,239 $7,220,520
=========== =========== =========== ==========
Net asset value, offering
and redemption price per
share..................... $ 36.14 $ 28.65 $ 22.83 $ 17.22
=========== =========== =========== ==========
SOURCE OF NET ASSETS:
Paid-in capital............ $35,431,401 $99,423,872 $42,032,901 $6,585,682
Undistributed net
investment income (loss).. 52,967 42,762 (9,914) (12,048)
Accumulated net realized
gain (loss) on
investments............... 1,864,212 (14,583,830) 75,999 539,417
Net unrealized appreciation
of investments............ 28,539,203 6,887,540 13,194,253 107,469
----------- ----------- ----------- ----------
Net Assets............... $65,887,783 $91,770,344 $55,293,239 $7,220,520
=========== =========== =========== ==========
</TABLE>
- --------
/1/SGF:$.10 par value, 10,000,000 shares authorized; SMDS: $1.00 par value,
10,000,000 shares authorized; SSCY: $.001 par value, 200,000,000 shares
authorized; SSVF: $.001 par value, 200,000,000 shares authorized.
* Fund commenced operations on December 31, 1997.
See accompanying notes to financial statements.
21
<PAGE>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Six Months Ended June 30, 1998 (unaudited)
<TABLE>
<CAPTION>
SGF SMDS SSCY SSVF*
---------- ----------- -------- --------
<S> <C> <C> <C> <C>
INCOME:
Dividends......................... $ 665,546 $ 3,570,763 $493,495 $ 25,998
Interest.......................... 170,437 99,691 85,212 5,213
---------- ----------- -------- --------
Total Income.................... 835,983 3,670,454 578,707 31,211
---------- ----------- -------- --------
EXPENSES:
Accounting/Pricing services fees
(Note 2)......................... 10,000 13,500 6,666 7,500
Administration services fees (Note
2)............................... 15,000 15,500 10,000 5,000
Advisory fees (Note 2)............ 231,085 292,861 264,914 15,141
Audit fees........................ 500 2,440 11,200 500
Custodian fees (Note 2)........... 12,866 18,005 10,946 4,313
Directors' fees................... 8,018 11,649 3,142 743
Insurance fees.................... 1,276 1,777 -- --
Legal fees........................ 1,750 2,519 1,471 190
Miscellaneous fees................ 3,070 4,565 2,268 192
Printing and postage fees......... 8,304 13,202 4,802 1,402
Registration fees (Note 2)........ 24,684 24,290 24,697 7,215
Shareholder services fees (Note
2)............................... 17,176 69,176 16,770 738
Taxes other than income taxes..... 2,537 3,675 1,000 325
---------- ----------- -------- --------
Total Expenses.................. 336,266 473,159 357,876 43,259
---------- ----------- -------- --------
Net Investment Income (Loss).. 499,717 3,197,295 220,831 (12,048)
---------- ----------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain on investments.. 1,874,241 2,191,728 92,669 539,417
Net increase (decrease) in
unrealized appreciation on
investments...................... 4,077,715 (7,455,384) 649,878 107,469
---------- ----------- -------- --------
Net gain (loss) on investments.... 5,951,956 (5,263,656) 742,547 646,886
---------- ----------- -------- --------
Net increase (decrease) in net
assets resulting from
operations..................... $6,451,673 $(2,066,361) $963,378 $634,838
========== =========== ======== ========
</TABLE>
- --------
* Fund commenced operations on December 31, 1997.
See accompanying notes to financial statements.
22
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SGF SMDS
-------------------------- ---------------------------
6 MONTHS ENDED YEAR ENDED 6 MONTHS ENDED YEAR ENDED
06/30/98* 12/31/97 06/30/98* 12/31/97
-------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income.. $ 499,717 $ 951,531 $ 3,197,295 $ 5,390,680
Net realized gain
(loss) on
investments........... 1,874,241 4,397,086 2,191,728 (775,344)
Net increase (decrease)
in unrealized
appreciation of
investments........... 4,077,715 10,314,063 (7,455,384) 11,680,867
----------- ----------- ----------- ------------
Net increase (decrease)
in net assets
resulting from
operations............ 6,451,673 15,662,680 (2,066,361) 16,296,203
----------- ----------- ----------- ------------
DISTRIBUTIONS TO
SHAREHOLDERS:
From net investment
income ($0.27 and
$0.54 per share,
respectively, for SGF,
$0.96 and $1.54,
respectively, for
SMDS)................. (482,477) (924,887) (3,154,533) (5,390,680)
From realized gains on
investments ($0.59 and
$2.52, per share,
respectively, for
SGF).................. (1,054,303) (4,096,574) -- --
Return of capital ($0
and $0.38 per share,
respectively, for
SMDS)................. -- -- -- (1,315,783)
CAPITAL SHARE
TRANSACTIONS:/2/ 795,407 4,735,008 (4,964,986) (11,413,251)
----------- ----------- ----------- ------------
Total increase
(decrease) in net
assets................ 5,710,300 15,376,227 (10,185,880) (1,823,511)
NET ASSETS:
Beginning of period.... 60,177,483 44,801,256 101,956,224 103,779,735
----------- ----------- ----------- ------------
End of period
(including
undistributed net
investment income
of $52,967 and
$35,727, respectively,
for SGF, undistributed
net investment income
of $42,762 and $0,
respectively,
for SMDS)............. $65,887,783 $60,177,483 $91,770,344 $101,956,224
=========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
SSCY SSVF
-------------------------- -------------------------
6 MONTHS ENDED YEAR ENDED 6 MONTHS ENDED YEAR ENDED
06/30/98* 12/31/97 06/30/98* 12/31/97**
-------------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income
(loss)................. $ 220,831 $ 311,167 $ (12,048) $ --
Net realized gain on
investments............ 92,669 1,579,761 539,417 --
Net increase in
unrealized appreciation
of investments......... 649,878 8,011,586 107,469 --
----------- ----------- ---------- --------
Net increase in net
assets resulting from
operations............. 963,378 9,902,514 634,838 --
----------- ----------- ---------- --------
DISTRIBUTIONS TO
SHAREHOLDERS:
From net investment
income ($0.11 and
$0.20/3/ per share,
respectively, for
SSCY).................. (254,510) (287,402) -- --
From realized gains on
investments ($0.04 and
$1.13/3/ per share,
respectively, for
SSCY).................. (96,899) (1,798,916) -- --
CAPITAL SHARE
TRANSACTIONS:/2/ 15,304,322 9,869,676 6,480,682 105,000
----------- ----------- ---------- --------
Total increase in net
assets................. 15,916,291 17,685,872 7,115,520 105,000
NET ASSETS:
Beginning of period..... 39,376,948 21,691,076 105,000 --
----------- ----------- ---------- --------
End of period (including
overdistributed net
investment income of
$9,914 and
undistributed of
$23,765, respectively,
for SSCY, net
investment loss of
$12,048 and $0,
respectively, for
SSVF).................. $55,293,239 $39,376,948 $7,220,520 $105,000
=========== =========== ========== ========
</TABLE>
/3/Adjusted for a 2-for-1 stock split declared by the Fund to shareholders of
record on December 17, 1997.
See accompanying notes to financial statements.
- --------
* Unaudited
** Fund commenced operations on December 31, 1997.
23
<PAGE>
CAPITAL SHARE TRANSACTIONS
- --------------------------------------------------------------------------------
/2/ A summary of capital share transactions follows:
<TABLE>
<CAPTION>
SGF
------------------------------------
6 MONTHS ENDED 06/30/98* YEAR ENDED 12/31/97
------------------------- -----------------------
SHARES VALUE SHARES VALUE
------------------------- --------- ------------
<S> <C> <C> <C> <C>
Shares issued.............. 247,132 $ 8,868,281 237,474 $ 7,625,883
Shares reinvested from net
investment income and
capital gains
distributions............. 37,892 1,332,668 140,717 4,398,631
---------- ------------- --------- ------------
285,024 10,200,949 378,191 12,024,514
Shares redeemed............ (264,185) (9,405,542) (235,166) (7,289,506)
---------- ------------- --------- ------------
Net increase............. 20,839 $ 795,407 143,025 $ 4,735,008
========== ============= ========= ============
<CAPTION>
SMDS
------------------------------------
6 MONTHS ENDED 06/30/98* YEAR ENDED 12/31/97
------------------------- -----------------------
SHARES VALUE SHARES VALUE
------------------------- --------- ------------
<S> <C> <C> <C> <C>
Shares issued.............. 76,041 $ 2,245,747 346,467 $ 9,958,751
Shares reinvested from net
investment income......... 59,280 1,761,828 134,590 3,765,100
---------- ------------- --------- ------------
135,321 4,007,575 481,057 13,723,851
Shares redeemed............ (302,924) (8,972,561) (893,776) (25,137,102)
---------- ------------- --------- ------------
Net decrease............. (167,603) $ (4,964,986) (412,719) $(11,413,251)
========== ============= ========= ============
<CAPTION>
SSCY
------------------------------------
6 MONTHS ENDED 06/30/98* YEAR ENDED 12/31/97
------------------------- -----------------------
SHARES VALUE SHARES VALUE
------------------------- --------- ------------
<S> <C> <C> <C> <C>
Shares issued.............. 912,677 $ 20,979,945 333,827 $ 12,981,282
Shares issued from stock
split..................... -- -- 864,479 --
Shares reinvested from net
investment income and
capital gains
distributions............. 12,101 278,798 39,255 1,672,816
---------- ------------- --------- ------------
924,778 21,258,743 1,237,561 14,654,098
Shares redeemed............ (254,768) (5,954,421) (131,386) (4,784,422)
---------- ------------- --------- ------------
Net increase............. 670,010 $ 15,304,322 1,106,175 $ 9,869,676
========== ============= ========= ============
<CAPTION>
SSVF
------------------------------------
6 MONTHS ENDED 06/30/98* YEAR ENDED 12/31/97**
------------------------- -----------------------
SHARES VALUE SHARES VALUE
------------------------- --------- ------------
<S> <C> <C> <C> <C>
Shares issued.............. 413,295 $ 6,497,313 7,000 $ 105,000
Shares reinvested from net
investment income and
capital gains
distributions............. -- -- -- --
---------- ------------- --------- ------------
413,295 6,497,313 7,000 105,000
Shares redeemed............ (932) (16,631) -- --
---------- ------------- --------- ------------
Net increase............. 412,363 $ 6,480,682 7,000 $ 105,000
========== ============= ========= ============
</TABLE>
- --------
* Unaudited
** Fund commenced operations on December 31, 1997.
See accompanying notes to financial statements.
24
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
June 30, 1998 (unaudited)
NOTE 1. - Significant Accounting Policies
Stratton Mutual Funds (the "Funds") consist of Stratton Growth Fund, Inc.
("SGF"), Stratton Monthly Dividend REIT Shares, Inc. ("SMDS") and The Stratton
Funds, Inc. The Stratton Funds, Inc. (the "Company") operates as a series,
consisting of Stratton Small-Cap Yield Fund ("SSCY") and Stratton Special
Value Fund ("SSVF"), which began operations on December 31, 1997. The Funds
and Company are registered under the Investment Company Act of 1940, as
amended, as open-end management investment companies. The Funds offer
diversified portfolios.
Investments in the Funds normally consist of common stock and securities
convertible into or exchangeable into common stock. Each Fund has specific
investment objectives:
The objective of SGF is to seek possible growth of capital with current income
from interest and dividends as a secondary objective.
The objective of SMDS is to seek a high rate of return from dividend and
interest income. Under normal conditions, at least 65% of the Fund's total
assets will be in securities of real estate investment trusts.
The objective of SSCY is to achieve both dividend income and capital
appreciation through investment in the securities of small-cap companies which
have certain risks associated with them. First and foremost is their greater
earnings and price volatility in comparison to large companies. Earnings risk
is partially due to the undiversified nature of small company business lines.
The objective of SSVF is to achieve capital appreciation through investment in
securities which represent a value or potential worth which is not fully
recognized by prevailing market prices.
Due to the inherent risk of investments there can be no assurance that the
objectives of the Funds will be met.
The following is a summary of significant accounting policies consistently
followed by the Funds in the preparation of their financial statements. The
policies are in conformity with generally accepted accounting principles.
A. Security Valuation - Securities listed or admitted to trading on
any national securities exchange are valued at their last sale price
on the exchange where the securities are principally traded or, if
there has been no sale on that date, at the mean between the last
reported bid and asked prices. Securities traded in the over-the-
counter market are valued at the last sale price, if carried in the
National Market Issues section by NASDAQ; other over-the-counter
securities are valued at the mean between the closing bid and asked
prices obtained from a principal market maker. All other securities
and assets are valued at their fair value as determined in good
faith by the Boards of Directors of the Funds, which may include the
amortized cost method for securities maturing in sixty days or less
and other cash equivalent investments.
B. Determination of Gains or Losses on Sales of Securities - Gains
or losses on the sale of securities are calculated for accounting
and tax purposes on the identified cost basis.
25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
June 30, 1998 (unaudited)
C. Federal Income Taxes - It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all taxable income to their
shareholders. Therefore, no federal income tax provision is
required. SMDS has a capital loss carryover available to offset
future capital gains, if any, of approximately $16,775,000 of which
$11,277,000 expires in 2003, $4,331,000 expires in 2004 and
$1,167,000 expires in 2005.
D. Use of Estimates in Financial Statements - In preparing financial
statements in conformity with generally accepted accounting
principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of income and
expenses during the reporting period. Actual results may differ from
these estimates.
E. Other - Security transactions are accounted for on the date the
securities are purchased or sold. Interest income is recorded on the
accrual basis and dividend income on the ex-dividend date.
Distributions to Shareholders - Distributions to shareholders are recorded on
the ex-dividend date. The character of distributions paid to shareholders is
determined by reference to income as determined for income tax purposes, after
giving effect to temporary differences between the financial reporting and tax
basis of assets and liabilities, rather than income as determined for
financial reporting purposes.
SMDS has made certain investments in real estate investment trusts ("REITs")
which pay dividends to their shareholders based upon available funds from
operations. It is quite common for these dividends to exceed the REIT's
taxable earnings and profits resulting in the excess portion of such dividends
being designated as a return of capital. The Fund intends to include the gross
dividends from such REITs in its monthly distributions to its shareholders
and, accordingly, a portion of the Fund's distributions will also be
designated as a return of capital.
NOTE 2. - During the six months ended June 30, 1998, the Funds paid advisory
fees to Stratton Management Company, (the "Advisor") as follows: SGF -
$231,085; SMDS - $292,861; SSCY - $264,914; SSVF - $15,141. Management
services are provided by the Advisor under agreements whereby the Advisor
furnishes all investment advice, office space and facilities to the Funds and
pays the salaries of the Funds' officers and employees, except to the extent
that those employees are engaged in administrative and accounting services
activities. In return for these services, SGF pays to the Advisor a monthly
fee of 3/48 of 1% (annually 3/4 of 1%) of the daily net asset value of the
Fund for such month. SMDS pays a monthly fee at an annual rate of 5/8 of 1% of
the daily net asset value of the Fund for such month. The Advisor has
voluntarily agreed to waive $15,000 annually of the compensation due it under
the agreement with each of these Funds to offset a portion of the cost of
certain administrative responsibilities delegated to First Data Investor
Services Group, Inc. ("Investor Services Group"), a wholly-owned subsidiary of
First Data Corporation.
SSCY pays a monthly fee at an annual rate of 0.75% of the daily net asset
value of the Fund for such month, subject to a performance adjustment. The
performance adjustment will be calculated at the end of each month based upon
a rolling 24 month performance period. The performance adjustment is added to
or subtracted from the basic investment advisory fee. The Fund's gross
performance is compared with the performance of the Frank Russell 2000 Index,
("Russell 2000"), a widely recognized unmanaged index of common stock prices,
over a rolling 24-month performance period. The Russell 2000 is composed of
the smallest 2000 stocks in the Frank
26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
June 30, 1998 (unaudited)
Russell annual ranking of 3000 common stocks by market capitalization. The
Russell 2000 is a widely recognized common stock index of small to medium size
companies. Total return performance on the Russell 2000 includes dividends and
is reported monthly on a market capitalization-weighted basis. When the Fund
performs better than the Russell 2000, it pays the Advisor an incentive fee;
less favorable performance than the Russell 2000 reduces the basic fee. Each
1.00% of the difference in performance between the Fund and the Russell 2000
during the performance period is equal to a 0.10% adjustment to the basic fee.
The maximum annualized performance adjustment rate is +/- 0.50% of average net
assets which would be added to or deducted from the advisory fee if the Fund
outperformed or under performed the Russell 2000 by 5.00%. The performance fee
adjustment for the six months ended June 30, 1998 caused the advisory fee to
increase by $71,488.
SSVF pays a monthly fee at an annual rate of 0.75% of the daily net asset
value of the Fund for such month, subject to a performance adjustment. The
performance adjustment for SSVF will commence at the end of the month in which
the Fund has completed 24 months of operation, if it has net assets of $20
million or more, at such date, or at the end of any succeeding month at which
it has net assets of $20 million, but in any event, irrespective of its net
assets, at the end of the month in which the Fund has completed 36 months of
operation and will be calculated at the end of the commencement month and each
succeeding month based upon a rolling 24 month performance period. The
performance adjustment is added to or subtracted from the basic investment
advisory fee. Pursuant to the performance adjustment, the Fund's gross
performance is compared with the performance of the Russell 2000. When the
Fund performs better than the Russell 2000, it pays the Investment Advisor an
incentive fee; less favorable performance than the Russell 2000 reduces the
basic fee. Each 1.00% of the difference in performance between a Fund and the
Russell 2000 during the performance period is equal to a 0.10% adjustment to
the basic fee. The maximum annualized performance adjustment rate is +/- 0.50%
of average net assets which would be added to or deducted from the advisory
fee if a Fund outperformed or underperformed the Russell 2000 by 5.00%. The
effect of this performance fee adjustment is that the advisory fee may never
be greater than 1.25% or less than 0.25% of the Fund's average daily net
assets for the preceding month. Due to the complexities of researching and
investing in special value securities, the advisory and incentive fees (if
realized) paid by the Fund are higher than those paid by most other investment
companies. Additionally, the Fund's incentive fee of plus or minus 0.50% is
greater than that of other mutual funds with similar objectives which pay
incentive fees.
Certain officers and Directors of the Funds are also officers and directors of
the Advisor. None of the Funds' officers receive compensation from the Funds.
Effective February 23, 1998, FPS Services, Inc. ("FPS"), a wholly-owned
subsidiary of FinDaTex, Inc., was acquired by Investor Services Group. Certain
Directors and officers of the Funds are shareholders of FinDaTex, Inc. Prior
to that, FPS received fees for providing shareholder services, for certain
administrative services and for accounting/pricing services as follows:
<TABLE>
<CAPTION>
SGF SMDS SSCY SSVF
------ ------- ------ ------
<S> <C> <C> <C> <C>
Shareholder Services............................... $7,135 $27,170 $7,639 $ 336
Administration..................................... 5,000 5,000 5,000 1,666
Accounting/Pricing................................. 3,333 4,333 3,333 3,333
</TABLE>
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued)
- -------------------------------------------------------------------------------
June 30, 1998 (unaudited)
Pursuant to an agreement between The Bank of New York, (the "Custodian"), and
Investor Services Group, the Custodian reallows a portion of its custody fees
to Investor Services Group for certain services delegated to Investor Services
Group. The amount is not readily determinable. FPS Broker Services, Inc., a
wholly-owned subsidiary of FinDaSub (formerly FPS), serves as the Funds'
principal underwriter and receives no fees for services in assisting in sales
of the Funds' shares but does receive an annual fee of $3,000 for each Fund
for its services in connection with the registration of the Funds' shares
under state securities laws.
NOTE 3. - Purchases and sales of investment securities, excluding short-term
notes, for the six months ended June 30, 1998 were as follows:
<TABLE>
<CAPTION>
SGF SMDS SSCY SSVF
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Cost of purchases.................. $5,289,450 $3,983,928 $18,158,235 $8,616,961
Proceeds of sales.................. 5,268,447 8,506,661 3,409,730 2,192,953
</TABLE>
NOTE 4. - Stock Split
A two-for-one stock split effected in the form of a dividend was issued to
shareholders of record of SSCY as of the close of business on December 17,
1997, payable December 18, 1997.
28
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Stratton Growth Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
6 MONTHS YEAR 7 MONTHS YEARS ENDED MAY 31,
ENDED ENDED ENDED ----------------------------------
06/30/98* 12/31/97 12/31/96 1996 1995 1994 1993
--------- -------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGIN-
NING OF PERIOD......... $ 33.39 $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89 $ 20.55
------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment in-
come................. 0.279 0.550 0.312 0.556 0.537 0.510 0.560
Net gains on
securities (both
realized and
unrealized).......... 3.331 8.900 1.298 5.759 2.978 0.665 1.160
------- ------- ------- ------- ------- ------- -------
Total from investment
operations.......... 3.610 9.450 1.610 6.315 3.515 1.175 1.720
------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (0.270) (0.540) (0.580) (0.540) (0.540) (0.510) (0.565)
Distributions (from
capital gains)....... (0.590) (2.520) (1.210) (0.945) (1.275) (0.905) (0.815)
------- ------- ------- ------- ------- ------- -------
Total distributions... (0.860) (3.060) (1.790) (1.485) (1.815) (1.415) (1.380)
------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 36.14 $ 33.39 $ 27.00 $ 27.18 $ 22.35 $ 20.65 $ 20.89
======= ======= ======= ======= ======= ======= =======
TOTAL RETURN............ 10.88% 36.06% 6.40% 29.62% 18.61% 5.92% 8.91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of pe-
riod (in 000's)...... $65,888 $60,177 $44,801 $42,880 $31,719 $25,475 $25,315
Ratio of expenses to
average net assets... 1.06%/1/ 1.11% 1.17%/1/ 1.16% 1.31% 1.34% 1.39%
Ratio of net
investment income to
average net assets... 1.57%/1/ 1.87% 2.08%/1/ 2.28% 2.70% 2.51% 2.76%
Portfolio turnover
rate................. 9.11% 34.40% 20.32% 15.41% 42.54% 49.81% 35.34%
Average commission
rate paid............ N/R $0.0509 $0.0537 N/A N/A N/A N/A
</TABLE>
- --------
* Unaudited
/1/Annualized
See accompanying notes to financial statements.
29
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
Stratton Monthly Dividend REIT Shares
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
6 MONTHS YEAR 11 MONTHS YEARS ENDED JANUARY 31,
ENDED ENDED ENDED --------------------------------------
06/30/98* 12/31/97 12/31/96 1996 1995 1994 1993
--------- -------- --------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING
OF PERIOD.............. $ 30.25 $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91 $ 27.83
------- -------- -------- -------- -------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... 0.973 1.540 1.630 1.880 1.940 1.870 1.940
Net gains (losses) on
securities (both
realized and
unrealized).......... (1.613) 3.200 0.160 2.600 (3.870) (1.140) 2.080
------- -------- -------- -------- -------- -------- -------
Total from
investment
operations......... (0.640) 4.740 1.790 4.480 (1.930) 0.730 4.020
------- -------- -------- -------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends (from net
investment income)... (0.960) (1.540) (1.630) (1.890) (1.920) (1.940) (1.940)
Distributions (in
excess of net
investment income)... -- -- (0.130) (0.030) -- (0.010) --
Return of capital..... -- (0.380) -- -- -- -- --
------- -------- -------- -------- -------- -------- -------
Total
distributions...... (0.960) (1.920) (1.760) (1.920) (1.920) (1.950) (1.940)
------- -------- -------- -------- -------- -------- -------
NET ASSET VALUE, END OF
PERIOD................. $ 28.65 $ 30.25 $ 27.43 $ 27.40 $ 24.84 $ 28.69 $ 29.91
======= ======== ======== ======== ======== ======== =======
TOTAL RETURN............ (2.19)% 18.09% 7.12% 18.98% (6.57)% 2.22% 15.18%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period
(in 000's)........... $91,770 $101,956 $103,780 $129,267 $134,066 $165,798 $98,227
Ratio of expenses to
average net assets... 0.98%/1/ 1.02% 1.02%/1/ 0.99% 1.08% 0.99% 1.10%
Ratio of net
investment income to
average net assets... 6.65%/1/ 5.48% 6.94%/1/ 7.42% 7.71% 6.12% 6.74%
Portfolio turnover
rate................. 4.28% 42.47% 69.19% 53.30% 39.50% 19.15% 35.94%
Average commission
rate paid............ N/R $ 0.0505 $ 0.0498 N/A N/A N/A N/A
</TABLE>
- --------
* Unaudited
/1/Annualized
See accompanying notes to financial statements.
30
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Small-Cap Yield Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
6 MONTHS YEAR 9 MONTHS YEAR YEAR FOR THE PERIOD
ENDED ENDED ENDED ENDED ENDED 04/12/93/1/
06/30/98* 12/31/97/3/ 12/31/96/3/ 03/31/96/3/ 03/31/95/3/ TO 03/31/94/3/
--------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD... $ 22.47 $ 16.79 $ 15.98 $ 12.94 $ 12.97 $12.50
------- ------- ------- ------- ------- ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income.............. 0.092 0.210 0.260 0.330 0.290 0.220
Net gains (loss) on
securities (both
realized and
unrealized)......... 0.418 6.800 1.740 3.040 (0.020) 0.450
------- ------- ------- ------- ------- ------
Total from
investment
operations........ 0.510 7.010 2.000 3.370 0.270 0.670
------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends (from net
investment income).. (0.110) (0.200) (0.270) (0.330) (0.300) (0.200)
Distributions (from
capital gains)...... (0.040) (1.130) (0.920) -- -- --
------- ------- ------- ------- ------- ------
Total distributions.. (0.150) (1.330) (1.190) (0.330) (0.300) (0.200)
------- ------- ------- ------- ------- ------
NET ASSET VALUE, END OF
PERIOD................ $ 22.83 $ 22.47 $ 16.79 $ 15.98 $ 12.94 $12.97
======= ======= ======= ======= ======= ======
TOTAL RETURN........... 2.26% 42.37% 12.84% 26.18% 2.09% 5.51%/2/
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (in 000's)... $55,293 $39,377 $21,691 $19,592 $14,058 $8,257
Ratio of expenses to
average net assets.. 1.39%/2/ 1.62% 1.29%/2/ 1.46% 2.12% 2.28%/2/
Ratio of net
investment income to
average net assets.. 0.86%/2/ 1.09% 2.03%/2/ 2.28% 2.36% 1.85%/2/
Portfolio turnover
rate................ 7.07% 26.27% 35.86% 33.50% 30.20% 28.60%/2/
Average commission
rate paid........... N/R $0.0548 $0.0579 N/A N/A N/A
</TABLE>
- --------
* Unaudited
/1/Commencement of operations
/2/Annualized
/3/Adjusted for a 2-for-1 stock split declared by the Fund to shareholders of
record on December 17, 1997
See accompanying notes to financial statements.
31
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Stratton Special Value Fund
The table below sets forth financial data for a share of capital stock
outstanding throughout the period.
<TABLE>
<CAPTION>
6 MONTHS
ENDED
06/30/98*
---------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $15.00/1/
INCOME FROM INVESTMENT OPERATIONS
Net investment loss............................................. (0.029)
Net gains on securities (both realized and unrealized).......... 2.249
------
Total from investment operations.............................. 2.220
------
NET ASSET VALUE, END OF PERIOD.................................... $17.22
======
TOTAL RETURN...................................................... 14.80 %
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)............................ $7,221
Ratio of expenses to average net assets......................... 1.61 %/2/
Ratio of net investment loss to average net assets.............. (0.45)%/2/
Portfolio turnover rate......................................... 38.79 %
</TABLE>
- --------
* Unaudited
/1/Commencement of operations 12/31/97
/2/Annualized
See accompanying notes to financial statements.
32
<PAGE>
SHAREHOLDER INFORMATION
- -------------------------------------------------------------------------------
MINIMUM INVESTMENT
The minimum amount for the initial purchase of shares of the Funds is $2,000
each. Subsequent purchases may be made in amounts of $100 or more.
TELEPHONE EXCHANGE
Shares of each Fund may be exchanged for shares of the other Funds, provided
such other shares may legally be sold in the state of the investor's
residence. Each Fund has a distinct investment objective which should be
reviewed before executing any exchange of shares. Shares may be exchanged by:
(1) written request; or (2) telephone, if a special authorization form has
been completed and is on file with the transfer agent in advance. See "How to
Redeem Fund Shares--Additional Information" in the Prospectus for a
description of the Funds' policy regarding telephone instructions.
DIVIDENDS AND DISTRIBUTIONS
SGF first declares and pays semi-annual dividends from net investment income.
SMDS declares and pays monthly dividends from net investment income. SSCY
declares and pays quarterly dividends from net investment income. SSVF
declares and pays annual dividends from net investment income. Each Fund will
make distributions of net realized gains, if any, once a year. Distributions
may be reinvested in additional shares of such Fund, see "How to Buy Fund
Shares--Reinvestment of Income Dividends and Capital Gains Distributions" in
the Prospectus.
AUTOMATIC INVESTMENT PLAN
Shares of a Fund may be purchased through our "Automatic Investment Plan" (the
"Plan"), (See item 6 of the New Account Application attached to the back of
the Prospectus). The Plan provides a convenient method by which investors may
have monies debited directly from their checking, savings or bank money market
accounts for investment in a Fund. The minimum investment pursuant to this
Plan is $100 per month. The account designated will be debited in the
specified amount, on the date indicated, and Fund shares will be purchased.
Only an account maintained at a domestic financial institution which is an
Automated Clearing House member may be so designated. A Fund may alter, modify
or terminate this Plan at any time.
SHARE PRICE INFORMATION
The daily share price of the Funds can be found in the mutual fund section of
most major daily newspapers as well as The Wall Street Journal and Investor's
Daily, where the Funds are listed under Stratton Funds. The Funds' stock
ticker symbols for SGF, SMDS and SSCY are STRGX, STMDX and STSCX,
respectively. A symbol has not yet been assigned to SSVF.
RETIREMENT PLANS
Stratton Mutual Funds has Defined Contribution Plans, Individual Retirement
Accounts and 403(b)(7) Retirement Plans available at no minimum investment.
33
<PAGE>
SHAREHOLDER INFORMATION (continued)
- -------------------------------------------------------------------------------
GENERAL INFORMATION ON THE FUNDS
Requests for a Prospectus, financial information, past performance figures and
an application, should be directed to the Funds' Distributor:
FPS BROKER SERVICES, INC.
3200 Horizon Drive, P. O. Box 61503, King of Prussia, PA 19406-0903
Telephone: 800-634-5726
EXISTING SHAREHOLDER ACCOUNT SERVICES
Shareholders seeking information regarding their accounts and other fund
services, and shareholders executing redemption requests, should call or write
the transfer agent and dividend paying agent:
FIRST DATA INVESTOR SERVICES GROUP, INC.
3200 Horizon Drive, P. O. Box 61503, King of Prussia, PA 19406-0903
Telephone: 610-239-4600 . 800-472-4266
INVESTMENT PORTFOLIO ACTIVITIES
Questions regarding any of the Funds' investment portfolios should be directed
to the Funds' Investment Advisor:
STRATTON MANAGEMENT COMPANY
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300, Plymouth Meeting, PA 19462-1050
Telephone: 610-941-0255
ADDITIONAL PURCHASES ONLY TO EXISTING ACCOUNTS SHOULD BE MAILED TO A SEPARATE
LOCK BOX UNIT:
c/o FIRST DATA INVESTOR SERVICES GROUP, INC.
P. O. Box 412797, Kansas City, MO 64141-2797
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION TO SHAREHOLDERS AND TO OTHERS WHO
HAVE RECEIVED A COPY OF THE COMBINED PROSPECTUS OF STRATTON MUTUAL FUNDS.
34
<PAGE>
------------------------------
STRATTON
MUTUAL FUNDS
------------------------------
STABILITY . STRATEGY . SUCCESS
DIRECTORS
Lynne M. Cannon
John J. Lombard, Jr.
Douglas J. MacMaster, Jr.
Henry A. Rentschler
Merritt N. Rhoad, Jr.
Alexander F. Smith
Richard W. Stevens
James W. Stratton
OFFICERS
James W. Stratton
Chairman
John A. Affleck
President, Stratton Monthly Dividend REIT Shares
Gerard E. Heffernan
President, Stratton Growth Fund
Frank H. Reichel, III
President, The Stratton Funds, Inc.
Portfolio Manager, Stratton Small-Cap Yield Fund
James Van Dyke Quereau
Vice President
Portfolio Manager, Stratton Special Value Fund
James A. Beers
Vice President
Joanne E. Kuzma
Vice President
Patricia L. Sloan
Secretary & Treasurer
Carol L. Royce
Assistant Secretary & Treasurer
INVESTMENT ADVISOR
Stratton Management Company
Plymouth Meeting Executive Campus
610 W. Germantown Pike, Suite 300
Plymouth Meeting, PA 19462-1050
Telephone: 610-941-0255
TRANSFER AGENT
& DIVIDEND
PAYING AGENT
First Data Investor Services Group, Inc.
3200 Horizon Drive, P.O. Box 61503
King of Prussia, PA 19406-0903
Telephone: 610-239-4600
800-472-4266
CUSTODIAN
BANK
The Bank of New York
48 Wall Street
New York, NY 10286
Visit the Stratton Mutual Funds
web site at http://www.strattonmgt.com
